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Break-up threat to energy's Big Six

Britain's Big Six energy suppliers face the threat of being broken up after regulators said they planned to refer the sector for a full-scale competition probe.

Ofgem said soaring household bills and intensifying public distrust highlighted the need for an investigation which will determine whether the companies are making excess profits - after they quadrupled to more than £1 billion in three years.

But British Gas owner Centrica warned that the probe, expected to last up to two years, could create uncertainty and threaten the billions of pounds worth of investment needed to keep the lights on.

Ofgem said a full-scale probe by the Competition and Markets Authority (CMA) would "clear the air" amid concerns that switching between suppliers had fallen and that those who never switched, many of them vulnerable customers, were being ripped off.

It also said it had found evidence of "possible tacit co-ordination" between companies on the timing and size of price announcements but stopped short of accusing them of explicitly colluding in an illegal cartel arrangement.

The CMA has extensive powers to shake up the sector by removing "long-term structural barriers to competition" which could include separating firms' generation arms from retail divisions selling gas and electricity to homes and businesses.

Retail profits increased from £233 million in 2009 to £1.1 billion in 2012, Ofgem said. It also found prices had risen by 24% over the period, well ahead of the rate of inflation at 13.8%.

The energy sector has been under intense political pressure in recent months over rising household bills at a time of a prolonged real-term squeeze on pay.

Labour pledged in September that it would force suppliers to freeze tariffs. The industry broadly rejected the policy as unworkable but yesterday SSE pledged to keep prices on hold until January 2016, pressuring rivals to follow suit.

Scrutiny has focused on the so-called Big Six - Centrica, SSE, E.ON, npower, RWE and EDF - which control 95% of the gas and electricity market in the UK.

They also own around 70% of the generating capacity - though only Centrica has significant gas production capability as part of its UK group.

It also has nearly 40% of the gas retail market, through British Gas, meaning it looks vulnerable if there is action to break up the dominant players in the sector.

Centrica chief executive Sam Laidlaw said he welcomed the chance to clear the air but claimed competition in the market was already intense.

He voiced fears that a lengthy probe could damage confidence at a time when more than £100 billion of new investment is needed in new infrastructure.

Mr Laidlaw said: "A prolonged period of uncertainty could damage investment at a time when Britain's energy security is being seriously challenged."

He told the BBC Radio 4 Today programme there was an "increasing risk" when asked if there was a threat of the lights going out.

The CMA investigation will be the first ever full-scale competition probe into the energy sector and will subject it to an unprecedented degree of scrutiny. It is likely to be launched within weeks following a consultation on Ofgem's findings.

The regulator said: "Profit increases and recent price rises have intensified public distrust of suppliers and highlight the need for a market investigation to clear the air."

Ofgem said it had already introduced a series of reforms which come fully into force from next month but had proposed a full CMA probe to reassure consumers and back up its attempts to achieve a "simpler, clearer and fairer energy market".

It said consumer trust in the sector had fallen significantly and while switching between suppliers had spiked at the end of last year there was no evidence of a consistent increase.

Ofgem also said the market shares of the Big Six had not changed significantly over time and they all had a high proportion of customers who rarely or never switch - who were more likely to belong to vulnerable groups.

Chief executive Dermot Nolan said: "Ofgem believes a referral offers the opportunity to once and for all clear the air and decide if there are any further barriers which are preventing competition from bearing down as hard as possible on prices."

In addition to the CMA referral, Ofgem said it was increasing the level of penalties for rule breaches.

Mr Nolan told the Today programme that consumers had been "troubled" by energy bills in recent months and an investigation was the "right thing" to address the concerns.

He said: "We have found competition is not working as well for consumers as it should be."

Energy Secretary Ed Davey backed the full-scale probe, saying: "This is just too important for people to rely on guesses about how to fix the energy markets. If we get it wrong, consumers will pay the price."

Labour's Caroline Flint said the announcement confirmed the market was broken and that a price freeze was needed for all customers.

Paul Massara, chief executive of npower, said: "In order for our customers to be confident in the facts around our business and the way we operate, the work started by Ofgem and OFT over the last few months mustn't be left half-finished. It's time that the realities of the energy market were made public.

"Britain has the third-cheapest gas prices in Europe and the seventh-cheapest electricity prices, and we have taken steps to get to the facts as to why bills are going up.

"If there are problems, they need to be dealt with, and where the market is operating well this can be acknowledged.

"Therefore we repeat our support for a full competition inquiry to provide solid, lasting evidence about the state of competition in the energy market today so that consumers and companies can be clear about the foundation for energy policy in the future.

"The energy industry is a long-term industry and needs a solid basis to build on. More importantly, British consumers deserve a full, comprehensive and vigorous investigation, as only then will we be able to start to instil trust back into the UK energy industry."

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